Import substitution Guide, Meaning , Facts, Information and Description
Import substitution is a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports (mostly finished goods) with locally produced substitutes. This usually involves government subsidies and high tariff barriers to protect local industries and hence import substitution policies are not favored by advocates of absolute free trade. In addition import substitution typically advocates an overvalued currency to allow easier purchase of foreign goods and capital controls.Import substitution policies were adopted by most nations in Latin America in the 1950s and 1960s. They were rejected by most nations in East Asia in the 1960s, and many economists attribute the superior performance of East Asia in the 1970s and 1980s to this difference in policies. Typically, import substitution policies would result in inefficient industries which created a drag on the economy.
In addition, the focus of import substitution in promoting industrialization typically resulted in policies which benefited industrial workers at the expense of farmers which made up most of the population of the nations involved. For example to reduce the cost of industrialization, the cost of food was often fixed at an artificially low level. In addition the licensing schemes required for an import substitution strategy led also to rent seeking behaviors which increased economic inefficiency.
In order to build up their manufacturing bases, many countries imposed high tariffs on manufactured goods, so that multinational companies would instead produce or assemble them locally. One example of this was in the motor industry, in which manufacturers exported vehicles in 'completely knocked down' (CKD) kit form, for local assembly. This often resulted in products that were of poorer quality and more expensive than those imported 'completely built up'. It also became increasingly inefficient for manufacturers to have identical products assembled locally in several countries in the same region, which only served to duplicate resources and reduce economies of scale.
As a result of the East Asian experience, import substitution policies generally became unpopular by the mid-1980s and was largely rejected by the Washington consensus.
However many economists have pointed out that the failure of import substitution should not necessarily be taken as an endorsement of free trade. They note that most East Asiann countries while rejecting import substitution also maintained high tariff barriers. The strategy followed by those countries was to focus subsidies and investment on industries which would make goods for export. The focus on export markets allowed them to create competitive industries.
By the end of the 1990's, the Washington consensus was being severely questioned. Nevertheless, there has not been a return to import substitution as a developmental strategy.
See also: border friction, Singer-Prebish Thesis, Export Oriented Industrialization
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